Tactical Asset Allocation – April 2021

Tactical Adaptive Strategies Update

Performance

All three of our strategies managed to deliver gains for the month.

Adaptive Global finished with a gain of 4.04% for the month and 10.05% Year To Date. The gain was led by positions in commodities and the S&P 500. Asia, which has been dominating returns, took a rest.

Adaptive Income finished with a gain of 1.15% for the month and 5.29% YTD. Adaptive Income was invested entirely in high yield.

Adaptive Innovation finished with a gain of 0.30% for the month and gain of 2.37% YTD. Our ARK fund positions were heavily hedged with Treasuries used to manage volatility.

Perspective

I have been investing in mutual funds, hedge funds, commodity accounts, newsletter strategies, and managed accounts for well over three decades. In observing these managers, I quickly observed that the vast majority of managers are far more challenged by portfolio losses than gains. From my viewpoint, it was the losses which destroyed both performance and trust.

I ultimately adopted a process in which I screened for above average returns and then filtered out those managers who showed excessive losses regardless of the gains. What guidelines have I used for the past two decades? A Compound Annual Growth of 10% and Maximum Drawdown during bear markets of 12%. While most managers are able to deliver the 8-10% returns in bull markets; it is the bear market drawdowns which eliminates the vast majority of prospective managers.

In doing my research, I quickly eschewed the typical 1-2-3-5-10 year performance figures in favor of historical performance in monthly tables. While infrequently offered, the monthly data was generally available on request. With this information in hand, I could do my own due diligence in calculating Compound Annual Growth, Maximum Drawdown, and the Standard Deviation of returns.

When I started developing Tactical Asset Allocation strategies, I made sure that my reports included very detailed performance statistics so I could see the bad as well as the good. When I began publishing strategies, I made sure that I shared as much of the performance data as practical including detailed monthly data in the Performance Tables.

I have always provided the Maximum Drawdown statistic for the performance history. I recently completed some programming which provides Maximum Drawdown to the right of the Compound Annual Growth Rate for each year. I hope that subscribers and readers find this additional information of use.

Market

From the April 30th Market Monitor

"The major indexes were mixed for a third week in a row with some weakness among mid and small caps and the NASDAQ 100. Several nascent trends may be faltering including the shift from value to growth and breadth improvement.

Although the S&P 500 appears to have started what will likely be a modest correction, the S&P 500 appears to be making a run for the next target at 4595 nearly 10% above this week’s close.

Cumulative Advancing Declining Volume remains slightly negative but is not showing signs of severe deterioration.

The Credit Markets Index declined a bit this week with a rise in emerging markets corporate yield. Generally, the credit markets remain stable and show no signs of investor risk aversion.

The Yield on the 10 year Treasury appears to have finished its correction and is likely to move up into the 2% range.

Gold has broken out of a 7 month declining channel decisively although we are seeing some correction to the recent rally. While we are likely to see another rise in Treasury yields, rising inflation results in falling real yields which is positive for gold.

I am in the camp which believes that the Fed will be forced to take action to cap rates on longer maturities if the 10 year Treasury moves much north of 2%. Actions could include: twisting the yield curve (buy long maturities, sell short maturities), QE (increase purchases of longer maturities), or Yield Curve Control (announcing yield caps and purchasing all of the supply which is not met by demand).

Equity market valuations continue their rise into eye popping levels. Market cap to GDP which touched 150%+- at previous peaks has now risen into the 200% range. The reversion, when it occurs, is likely to exceed all modern historical precedent. Markets run on investor psychology and the reversion will not occur until there is a major shift.

My general sense from all of the data is that the market internals are showing some loss in momentum. This is not the same as turning into a bear market as there are few signs of the material reversal in investor psychology which would presage a major decline."

Thank you for reading.

Earl Adamy

Ready to learn More about the Strategies?

Exceptional results are due entirely to the complementary strengths of our Market Conditions Model and our Tactical Model.

Not ready to subscribe but want to stay in the loop?

Sign up for Earl's Tactical Asset Allocation Strategies newsletter and receive his featured articles and performance updates.

Compares performance of the Tactical Adaptive Strategies to the S&P 500 and Vanguard Balanced Index Fund

Supporting tables for Tactical Adaptive Global. S&P 500 (SPY) and Vanguard Balanced Index Fund (VBINX) can be found below

Our backtest results tables are constructed for two full market cycles beginning in January 2000.

The most recent market cycle covers October 2007 to date. The fund baskets for our tactical strategies are constructed from indexed Exchange Traded Funds (ETFs) with just two exceptions, an Open End Fund and a Closed End Fund, both with long history.

The earlier market cycle covers January 2000 through September 2007. A number of the ETFs we use were not created until later in the decade. For those cases, we infill using predecessor Open End Funds (OEFs) for which the indexing and/or subclass is substantially similar to the ETF. Aside from providing insight into possible strategy performance during a second, earlier, cycle, they also offer the advantage of completely out of sample data. The fact that the metrics of both cycles are very comparable appears to validate the process.

We have been asked if it is possible to extend backtests to earlier decades. While this appears to be a common practice with some services; it is not possible to produce credible results for many strategies due to the lack of funds with substantially similar indexing and/or subclass. Doing so would force me to stretch the term "substantial" far beyond my comfort level.

A Caveat

A 35+ year secular bull market in both equities and bonds began in 1982. The last cyclical bull market in equities (and to a lesser extent, bonds) began 10 years ago. Returns during these periods have been historically exceptional. Market returns for the next 10 years are highly unlikely to approach those of the past 10. In fact, there is at least some evidence that market returns have a high probability of being significantly lower and that bonds and equities (which have risen together) may actually begin working at cross purposes.

Investors should not use the statistics shown for our strategies to establish expectations of specific levels of returns or drawdowns. Investors should, however, appreciate that we believe the principles which underlie the Tactical Adaptive Global, Tactical Adaptive Income, and Tactical Adaptive Innovation Strategies are enduring enough to significantly outperform the market in the future, both in lowering risk and in improving returns.

Benchmark S&P 500 (SPY)

Benchmark Vanguard Balanced Index Fund (VBINX)

Compares performance of the Tactical Adaptive Strategies to the S&P 500 and Vanguard Balanced Index Fund

Supporting tables for Tactical Adaptive Income, S&P 500 (SPY) and Vanguard Balanced Index Fund (VBINX) can be found below

Our backtest results tables are constructed for two full market cycles beginning in January 2000.

The most recent market cycle covers October 2007 to date. The fund baskets for our tactical strategies are constructed from indexed Exchange Traded Funds (ETFs) with just two exceptions, an Open End Fund and a Closed End Fund, both with long history.

The earlier market cycle covers January 2000 through September 2007. A number of the ETFs we use were not created until later in the decade. For those cases, we infill using predecessor Open End Funds (OEFs) for which the indexing and/or subclass is substantially similar to the ETF. Aside from providing insight into possible strategy performance during a second, earlier, cycle, they also offer the advantage of completely out of sample data. The fact that the metrics of both cycles are very comparable appears to validate the process.

We have been asked if it is possible to extend backtests to earlier decades. While this appears to be a common practice with some services; it is not possible to produce credible results for many strategies due to the lack of funds with substantially similar indexing and/or subclass. Doing so would force me to stretch the term "substantial" far beyond my comfort level.

A Caveat

A 35+ year secular bull market in both equities and bonds began in 1982. The last cyclical bull market in equities (and to a lesser extent, bonds) began 10 years ago. Returns during these periods have been historically exceptional. Market returns for the next 10 years are highly unlikely to approach those of the past 10. In fact, there is at least some evidence that market returns have a high probability of being significantly lower and that bonds and equities (which have risen together) may actually begin working at cross purposes.

Investors should not use the statistics shown for our strategies to establish expectations of specific levels of returns or drawdowns. Investors should, however, appreciate that we believe the principles which underlie the Tactical Adaptive Global, Tactical Adaptive Income, and Tactical Adaptive Innovation Strategies are enduring enough to significantly outperform the market in the future, both in lowering risk and in improving returns.

Benchmark S&P 500 (SPY)

Benchmark Vanguard Balanced Index Fund (VBINX)

Compares performance of the Tactical Adaptive Strategies to the S&P 500 and Vanguard Balanced Index Fund

Supporting tables for Tactical Adaptive Innovation, S&P 500 (SPY) and Vanguard Balanced Index Fund (VBINX) can be found below

The Innovation ETFs used in the Innovation Strategy were not established until 2014-2015 so our history is limited. There are no predecessor funds which are similar enough to use for infill.

A Caveat

A 35+ year secular bull market in both equities and bonds began in 1982. The last cyclical bull market in equities (and to a lesser extent, bonds) began 10 years ago. Returns during these periods have been historically exceptional. Market returns for the next 10 years are highly unlikely to approach those of the past 10. In fact, there is at least some evidence that market returns have a high probability of being significantly lower and that bonds and equities (which have risen together) may actually begin working at cross purposes.

Investors should not use the statistics shown for our strategies to establish expectations of specific levels of returns or drawdowns. Investors should, however, appreciate that we believe the principles which underlie the Tactical Adaptive Global, Tactical Adaptive Income, and Tactical Adaptive Innovation Strategies are enduring enough to significantly outperform the market in the future, both in lowering risk and in improving returns.

Benchmark S&P 500 (SPY)

Benchmark Vanguard Balanced Index Fund (VBINX)

This strategy is intended to capitalize on trending moves in both precious metals and bitcoin if and when they occur while managing volatility to reduce risk. The strategy, which uses a basket of precious metals, bitcoin, and Treasury funds, selects the single best fund each month although it provides blended allocations when necessary to manage volatility.

Bitcoin is a relative newcomer to investable assets and we take no position as to whether bitcoin is or is not a sustainable asset class. The Grayscale Bitcoin Trust used in this strategy was not established until 2015 so our history is limited. There are no predecessor funds which are similar enough to use for infill.

The CAGR in 2017 is extraordinary; however the bitcoin trust rose 1893% from $1.17 to $22.15 during this period. While the strategy remained invested in bitcoin for 10 of the 12 months, volatility weighting significantly reduced the weighting to bitcoin from a low of 14.6% to a high of 68.0%. The use of Treasuries to manage bitcoin volatility accounts for the high percentage invested in fixed income assets.

Volatility weighting has little effect on precious metals which typically receive a 100% weight when selected.